Industry captains make sweeping suggestions for long-term reform

Industry captains make sweeping suggestions for long-term reform. An eager Government wants to get cracking but is still trying to figure out how.

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SHEFALI REKHI

December 28, 1998

ISSUE DATE: December 28, 1998

UPDATED: April 15, 2013 15:24 IST

Empowering for action: A.B. Vajpayee is banking on trusted lieutenant Jaswant Singh to come up with concrete results

When Prime Minister Atal Bihari Vajpayee nominated 12 industrialists to a special advisory council on trade and industry in October, there was much talk about it.

It was for the first time in five decades that the Government was letting the private sector have a direct say in policy-making, hitherto the prerogative of bureaucrats.

Through this forum, six task force committees with names like Ratan Tata and Mukesh Ambani as heads were set up and asked to make suggestions within six weeks to revive the economy.

The committees promptly submitted their reports and the Government believes that the collaborative effort has paid off. "Now there is clear consensus on reform ideas," says N.K. Singh, member-secretary of the council.

In a hurry to push ahead with reforms, the prime minister even set up an empowered committee of ministers to act upon the task force committees' suggestions. The panel is headed by External Affairs Minister Jaswant Singh and has Finance Minister Yashwant Sinha and Industry Minister Sikander Bakht as members, all faces of liberalisation within the BJP. All very well.

But as policy watchers point out, the reports themselves are deficient, in the sense that they make sweeping recommendations without really detailing how to go about them. Numbering over 200, they are hardly concerned with immediate economic recovery. The long-term measures are tilted in favour of the corporates.

One of the sub-committees on knowledge-based industries covers much the same ground as the information-technology task force. The empowered committee too, it is feared, will not make a difference as it will be under the same constraints that the Government has been till now.

Equally important, it is to be seen if the well-entrenched bureaucracy will allow these steps to become a reality since it would entail curtailment of its own powers. A look at some of the areas covered by the reports and what they hold for the high-power committee:

Capital MarketsThe recommendations concentrate on long-term reform measures such as setting up of depositories for fixed income securities, encouraging foreign institutional investors to improve the debt market and giving a stronger thrust to disinvestment, even at marked down prices to boost the equity market.

"What good can these measures do when investors are simply not willing to invest?" questions L.C. Gupta, director, Society for Capital Markets, Research and Development.

"These recommendations are from a corporate point of view and do not address the real issue." Which is to restore the confidence of investors. According to a recent all-India research study by the Society for Capital Markets, investors are reluctant to put their money on the private sector.

Only 15 per cent thought it would be safe to invest in private-sector bonds, while 80 per cent preferred bonds by the development financial institutions.

More significantly, only 5 per cent said they would actually invest in a private-sector issue in the next one year. Given such findings, the task force would have done well to detail ways of how investor confidence could get a boost, what action should be taken against defaulting promoters and how to tackle the ballooning problem of companies getting their shares de-listed from the various stock exchanges.

Solutions such as these would get the investor back into the retail market, instill greater confidence in the Government and put the economy back on the growth curve.

Agro Industries"Transform India into the world's largest food factory in the next five years," says the report but doesn't explain how that can be done.

It does advise the Government to increase plan spending during the Ninth Plan from 5.1 per cent to 7.1 per cent, institute another task force to immediately implement 75 per cent of the existing 300 incomplete irrigation projects in two-three years and do away with artificial controls such as storage limits on wheat and rice.

But experts reason that these may not be enough. Output and productivity in agriculture have suffered from rigid import and export controls which have prevented farmers from getting a better price for their products; local restrictions on trade and transportation have aided price distortions; reserving the agro-processing sector essentially for the small-scale sector has bred inefficiency.

The task force does not make clear a suitable import and export policy for agricultural commodities nor does it suggest a strategy to liberalise the domestic market.

There is no talk about the need to abolish the Essential Commodities Act, under which many of the controls are imposed though it has become redundant. "You can't keep wishing away globalisation, it is just round the corner," says agricultural economist Ashok Gulati.

"In fact, we will be renegotiating our terms on agriculture by December '99 under the World Trade Organisation. However, the task force does not seem to deliberate on it in detail. I'd be more happy to see an operational strategy document."

Even where it has made some worthwhile recommendations, the report fights shy of getting into the nitty-gritty. Repealing the Urban Land Ceiling Act for instance. The real problem here is of leasing.

Under the existing law, farmers to whom land is leased get to have a total say on it in two-three years depending on the laws existing in the state they are in. This has led to several benami land holdings, discouraging insurance and lending operations. But this is an area untouched by the report.

Another recommendation pertains to fertiliser subsidies, saying they must be reoriented to correct distortions in the use of nutrients. For this the Government must make a beginning by reimposing its budget decision of hiking the selling prices of urea by Re 1 a kg, a decision which had been rolled back under political pressure.

It remains to be seen if the empowered committee will reimpose the price hike given that the political considerations are the same.

InfrastructureUndoubtedly the most critical issue holding back growth, it still cries for greater attention. The report has some fresh ideas like a new spectrum policy in telecom to enable the allocation of frequencies to the private sector and the setting up of special purpose vehicles (SPVs).

The SPVs which will get clearances in place from the Central and state governments before bids are invited for projects will help save on time and cost delays. But for these, the report on infrastructure is a reiteration of reform moves currently on.

Arduous task: The success of the Government-industry effort depends on how Sikander Bakht and N.K. Singh plug gaps in the reports

Rakesh Mohan, director-general, National Council of Applied Economic Research, however, is not so dismissive. "In a sector like infrastructure where the private sector has to be involved in a major way, their endorsement itself is significant," he feels.

"The report makes clear what is the best practice to be followed and now it is for the Government to go beyond." But to implement some of these measures, the Government does need to put in a lot of groundwork.

For instance, the task force recommends a shift from the licence fee-based approach for telecom projects to a service tax-based one. In other words, it wants a shift to the revenue-sharing system. But it doesn't explain how this can be brought about.

A change post-tendering will also mean litigation which hasn't been addressed. The task force is of the view that the licence fee paid should be treated as an advance against future dues.

This would be difficult for the Government since it is possible that the money has already been consumed. Similarly in the case of power, there are many questions left unanswered.

N.K. Singh

While the task force recommends restructuring of state electricity boards, it doesn't dwell on the issue of raising user charges from rural and domestic consumers.

There is also a recommendation that theft of power ought to be curtailed but it is left to the Government to figure out how this should be done.

With the reports offering few workable solutions, the task before the empowered committee is not easy to say the least.

It will first have to figure out ways in which the various recommendations can be implemented before getting down to action. One only hopes that this does not entail the formation of another set of committees.

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